2023 (6) TMI 176 - AT - Income Tax

Income deemed to accrue or arise in India - elements necessary for make available clause - Income earned by the Appellant characterized to be in the nature of Fees for Included Services/ Fees for Technical Services under the Act and the India-USA Tax treaty and is consequently subject to tax in India - assessee before us is a US entity and there is a DTAA between India and USA - whether the 'technical services' are made available to Indian customers/ clients? - HELD THAT - In the instant case, the Indian customers/clients have to repeatedly seek the assessee s services in respect of testing/research followed by a report on the outcome of such testing/research undertaken by the assessee. Assessee is neither involved in supporting a system which is put in place or is already in place by the Indian customers/clients nor getting its Indian customers/clients equipped to carry on the testing/research independently of the assessee. The utility of the services available in the form of a report, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. Support that the Indian entity seeks after the report is delivered is to understand the report from the assessee. Elements necessary for make available is absent in the services rendered by the assessee to its Indian customers/ clients, inasmuch as even for the said reports, the customers have to continuously refer to the assessee and the same is not freely made available to the Indian customers. Thus, technical services rendered by the affiliates do not make available technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/ clients. In light of the aforementioned judicial decisions, we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year. Decided in favour of assessee.

Summary

Issues Involved:
1. Characterization of Income as Fees for Included Services/Fees for Technical Services.
2. Consequential levy of interest under section 234A and section 234B.
3. Initiation of penalty proceedings under section 271(1)(c) and section 271F.

Summary of Judgment:

Issue 1: Characterization of Income as Fees for Included Services/Fees for Technical Services
The main contention was whether the income earned by the assessee, a non-resident company providing pre-clinical laboratory services, should be characterized as Fees for Included Services (FIS) or Fees for Technical Services (FTS) under the Income Tax Act and the India-USA Tax Treaty. The assessee argued that the services provided did not "make available" technical knowledge, experience, skill, know-how, or processes to its Indian customers as required under Article 12(4) of the Tax Treaty. The AO, however, held that the services were technical and the income was taxable in India under both the IT Act and the DTAA. The DRP upheld the AO's view, stating that the services rendered became part of the technical know-how of the client, thereby making knowledge transfer. The Tribunal, however, relied on various judicial precedents, including the Hon'ble Karnataka High Court in the case of De Beers India Minerals (P.) Ltd., and concluded that the services did not "make available" technical knowledge to the Indian clients. Thus, the income was not taxable in India under the Treaty.

Issue 2: Consequential levy of interest under section 234A and section 234B
The Tribunal noted that since the primary issue of characterization of income was decided in favor of the assessee, the consequential levy of interest under sections 234A and 234B would not arise.

Issue 3: Initiation of penalty proceedings under section 271(1)(c) and section 271F
Similarly, the initiation of penalty proceedings under sections 271(1)(c) and 271F was found to be consequential to the primary issue and thus did not require separate adjudication.

Conclusion:
The appeals filed by the assessee were allowed, with the Tribunal holding that the income earned by the assessee was not taxable in India under the India-USA Tax Treaty. The consequential issues regarding interest and penalty proceedings were also resolved in favor of the assessee.